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Unsubstantiated allegation of reasonable apprehension of bias may result in costs

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The recent Ontario Superior Court of Justice decision in Allied Track Services Inc v Jeffery Swift(1) confirms that an arbitration party should not unreasonably be deprived of its contractual right to appoint an arbitrator of its choice, and that a party bringing unsubstantiated allegations of a reasonable apprehension of bias may face cost consequences. The court also reaffirmed that the assessment of whether a reasonable apprehension of bias exists is a highly fact-specific inquiry that must consider commercial realities. Although Allied Track Services was a domestic commercial arbitration, the findings are consistent with the 2010 decision in Telesat Canada v Boeing Satellite Systems International, Inc,(2) in which the same court determined that the president of the international arbitral tribunal should be removed under the UN Commission on International Trade Law Arbitration Rules (1976).

In Allied Track Services the applicant brought a motion to have an arbitrator appointed to determine post-closing adjustments under a share purchase agreement. The respondents objected to the applicant's proposed arbitrator, alleging reasonable apprehension of bias on the basis that the proposed arbitrator's employer accounting firm had retained the applicant's law firm on unrelated matters.

The court determined that the respondents had attempted to upset the arbitration process in bad faith by raising meritless allegations of bias, ultimately depriving the appellant of its contractual right to have the arbitrator act as such pursuant to the agreement. The court held that these actions were deserving of a cost order, fixed at C$34,617.

Facts

A dispute arose between the applicant and respondents in relation to three post-closing adjustments under a share purchase agreement. The agreement provided that if there were any dispute regarding these adjustments, the parties would jointly retain accounting firm BDO Canada Limited to resolve the dispute.

However, the respondents refused to engage BDO on the grounds that the applicant's law firm had acted for BDO in a recent unrelated matter, which the respondents claimed raised a reasonable apprehension of bias.

Although the parties agreed that they would retain the BDO arbitrator forthwith, with the issue of any alleged bias or conflict of interest to be raised with the arbitrator, the respondents again refused to sign an engagement letter with BDO.

In response, the BDO arbitrator informed the parties that he would no longer act as arbitrator in the matter, even though he expressly disclaimed any conflict in relation to the applicant's counsel.

The applicant then suggested that each party propose two substitute arbitrators for consideration. The applicant proposed arbitrators from two other accounting firms and the respondents proposed two former judges. The applicant informed the respondents that while the former judges were experienced, independent and highly regarded, neither possessed the necessary accounting skill to deal with the technical issues of the dispute. The respondents again alleged that the applicant's proposed substitute arbitrators raised a reasonable apprehension of bias on the same grounds as the BDO arbitrator.

The applicant then sought the court's assistance to have an arbitrator appointed and claimed costs against the respondents.

Before the hearing, the parties advised the court that the applicant had consented to the appointment of one of the former judges who had been proposed by the respondent. However, the applicant pursued costs against the respondents on the grounds that there was no basis for their allegations of a reasonable apprehension of bias, noting that, being in a "complete bind", it had agreed to the appointment only to avoid further delays and challenges to the process, with the inevitable increase in costs.

Decision

The court appointed the former judge in accordance with the parties' agreement, but found that there were no grounds to conclude that the appointment of BDO or any of the accounting firms that were proposed by the appellants would have given rise to a reasonable apprehension of bias.

The court outlined the test for a finding of reasonable apprehension of bias, noting that the threshold is high, as the inquiry calls into question the personal integrity of the adjudicator and the administration of justice. The court observed that the test is an objective one that asks what an informed person, viewing the matter realistically and practically, would conclude.

The court determined that none of the instances where the applicant's law firm had been retained by any of the accounting firms had anything to do with the parties or issues that were involved in the matter. While courts have found reasonable apprehension of bias in circumstances where adjudicators have had close personal relationships with one of the parties, there was no professional relationship between the proposed arbitrator and the parties to the arbitration that could reasonably ground a finding of bias.

The court also noted that if the concept of bias were stretched to apply in these circumstances, there would be commercially unreasonable consequences:

"If the position of the respondents that a reasonable apprehension of bias existed in these circumstances, there would be great difficulty for most of the major commercial law firms in Toronto in ever being able to represent clients in front of such accounting firms who were chosen as arbitrators in a commercial dispute as these law firms all are routinely retained by the large accounting firms to act in commercial insolvency matters…BDO, Duff & Phelps and Grant Thornton are just three of such firms. They too would be precluded from acting as arbitrators in any case in which one of the law firms acting for one of the parties to the arbitration had been retained by them in unrelated matters. The result would be that in commercial arbitrations calling for accounting expertise, all of the large accounting firms and all of the firms experienced in commercial disputes would invariably be unable to act. This should obviously be avoided if at all possible."

The court affirmed that the inquiry in each case is highly fact specific. On the facts before it, the court held that the respondent had no reasonable basis for its allegations and by raising them had deprived the applicant of its contractual right to have BDO act as arbitrator. The consequences of the respondents' bad faith in attempting to upset and derail the arbitration process was a cost award, in spite of the consent order, fixed at C$34,617.

Comment

Allied Track Services provides practical guidance to commercial arbitration parties on the legal and practical implications of potential conflicts relating to the appointment of arbitrators. The decision sends a strong warning to parties to be wary of making baseless attempts at upsetting the arbitration process.

Although the court did not consider Telesat – in which an arbitrator was removed on the basis of a reasonable apprehension of bias, albeit in different circumstances – Allied Track Services underscores that courts continue to take a practical and commercially realistic approach to attempts to oust arbitrators on the basis of alleged bias or partiality. Arbitration parties raise such allegations for tactical reasons or on insubstantial grounds at their own peril.

For further information on this topic please contact Robert JC Deane at Borden Ladner Gervais LLP by telephone (+1 604 640 4250) or email (RDeane@blg.com). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.

Endnotes

(1) 2015 ONSC 5496.

(2) 2010 ONSC 4023.

Shelby Liesch, articled student, assisted in the preparation of this update.

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